Climate Technologies

Roman Dubczak: Hello, everyone. I’m Roman Dubczak, Deputy Chair of CIBC Capital Markets. The pursuit of achieving a net-zero emissions economy by 2050 globally is a central theme for governments, businesses and citizens worldwide. Meeting the challenges of climate change to date has primarily activated capital to be directed toward clean energy technologies. For example, $0.5 trillion is starting to work its way through the US economy alone, reshaping the energy complex and climate technology as a result, commercializing technological innovations that are notoriously capital intensive and require a level of risk that challenges existing business models. In the US, the Inflation Reduction Act was supposed to help with hundreds of billions in grants, loans and tax credits. The question is a year-and-a-half on, has this had the impact that policymakers had hoped for, and what are the barriers preventing faster commercialization of these vital technologies? Here with me to provide further insights are my colleagues, James Wright, Managing Director and Co-Head of Corporate Banking based in Chicago, and Luisa Fuentes, Managing Director and Head of our Energy Transition practice in US Corporate Banking, based in New York City. James, Luisa, thanks for joining me here today. James, let’s start with you. I mentioned the shift in capital allocation in order to support climate innovation. It’s a rapidly evolving area which has experienced mixed success, not unexpected, but mixed success. In your opinion, how should climate technologies be viewed in the wider energy transition and what’s going on? And are we on or off course?

James Wright: Sure. Thanks, Roman. Great to be here today. First thing I say on this question is it’s it’s a real challenge ensuring a neat ring around what we mean by climate driven or energy transition technologies. We’re seeing a significant investment across the infrastructure landscape driven by the “climate and transition theme”. So, at an obvious level, a lot of the renewable energy stuff wind, solar, offshore wind has been a key winner, undoubtedly. These industries have been a huge success. They’re cost competitive and will continue to grow significantly in the coming decades. Then the next layer down, you have these new next generation technologies. Energy storage, the hydrogen economy, the carbon capture value chain. Those three themes alone, we’ll probably spend a podcast on each. Some headwinds and tailwinds for each of them. But as we’ve seen, there’s real dollars going into the ground in each of those sectors today. Then it would be remiss of us not to mention the natural gas markets. It’s really filling an important gap right now driven by the digitization of everything. Data centres are a really great example there. I think currently those data centres take about 2.5% of U.S. electricity demand. That’s forecast to be 7.5% by 2030, which alone will require 30GW of additional firm capacity. So real firm demand needed from gas assets. Related to all of this, we’re seeing the start of a manufacturing renaissance here in the US. Reshoring of manufacturing, advanced manufacturing in technologies like batteries, EV components, and wind and solar. One area I think there’s still a concern, is we’re a bit off course in transmission. It’s great to have all this supply side, green energy. But you’ve got to get it where it’s needed. And the US federal permitting system has been a real challenge there. And folks in Congress need to solve that.

Roman Dubczak: Thanks, James. A few years ago, John Doerr, the famous venture capitalist, wrote a book called Speed and Scale. And in the book, one of the most quoted sentences was, “we need to invest like our lives that depend on it, because they do.” Today, the analysis emerging that the cost of climate change to the global economy is going to be on the order of $38 trillion by mid-century. So just remarkable impact on our lives and on the global economy. You know, that book was written three years ago. And so to provide some context, you know, where do you think we’ve had success and perhaps failure, if you will, in terms of moving forward with that agenda?

James Wright: I mean, it’s a very, very poignant for you to think about this, to frame it up. We’re certainly seeing a significant, sustained wall of capital pointing towards the space. That’s a great positive, whether it’s from banks, the private capital markets, funds, asset managers, private equity. I think the challenge is the speed part of your quote. Banks like ours, for example, typically don’t move at the speed of light intentionally. We’re thoughtful and risk focused, and we deploy capital as stewards of the balance sheet. So you have a challenge there where, on the one hand, you’ve got deep pockets that can help really solve this problem. On the other hand, we’re all taking it one step at a time. So whether we’re moving quick enough, I think is an open question candidly. That said, I think we can point to a lot of success stories. For example, look at the volume of renewables that have been built in the US the past ten years. 280GW in ten years, which is just tremendous, when you think about that. The energy storage market, it has a huge value proposition with more imminent supply coming on the grid from renewables. Demand side growth, total installed battery storage capacity, I think was only about a gigawatt three years back. Now we’re over 25GW today. So that’s just been, again, a tremendous success story and more growth to come there. Those more nascent industries that are coming very real. So hydrogen hubs and CCUS hubs have now received fundamental DOE support, which has been great to see. I think over $9 billion of appropriated funds for the hydrogen market, about $8 billion for CCUS. So again, real dollars that are helping bring these projects to fruition, I think, would also be remiss not to mention offshore wind. There’s been some delays and some hiccups there, as we know, but we’re seeing monopole foundations going into the East Coast now. It’s happening. It’s real. And actually interesting and lots of M&A activity. I think there’s been about ten announced M&A transactions in that space. And many of these haven’t even started construction yet. So real activity in offshore wind.

Roman Dubczak: Luisa focusing on the more early stage technology so to speak. We often hear the term ‘Valley of Death’, in the VC world as relates to the difficulties in going from what you would call Series B financing, to scale and sufficient technological viability. Tell us what that means in the world of clean tech and ‘why’ or ‘and if’, it is a barrier to innovation in this space.

Luisa Fuentes: Yeah. Thank you. This is an excellent question. CIBC spends a lot of time with clients in this space who are somewhere between their pilot and their proven technologies, with the ultimate goal of financing into a debt capital markets or debt markets where they can de-fees and de-risk their investors. The issue, obviously, is that project finance lenders are non-recourse lenders. They provide capital against a project with a set of contracts, and they require performance of that asset in the long-term in order to get repaid. So if there is a new technology that has been performing a few years, but not necessarily at scale, lenders don’t have enough of a historical data set to support a credit investment. So one of the simplest and most obvious answers that we tend to give clients is, you know, to seek corporate support, either through direct balance sheet financing or some kind of completion undertaking from a creditworthy counterparty. Or to seek out those DOE vehicles that James mentioned, so through loans or grants and other state and federal incentives that could exist to finance their technologies as a scale up to get proven.

Roman Dubczak: Okay. Point taken Luisa. So, how would we guide our clients to avoid the value of that, so to speak?

Luisa Fuentes: Sure. I think the answer will really depend on the development, and it’s specific to each client, but I’ll try to speak generally. First thing I would say is that not all technology risk is the same. Some technologies are in fact evolutions of existing technologies. They are either a change in the solvent and a chemical process, or a back-end process that’s attached to something that’s been in existence for 20 years. So to our clients, we say, you know, there’s a difference between marketing yourself as a game changing technology and transformative and also just really drilling into what the key risks are. So lenders will speak a different language, and you’ll want to make sure you isolate the risk and be able to explain those risks. Because they may not be as tangible as lenders perceive them to be. A second thing I always advise clients on is to hire an independent engineer early. Independant engineers, can be painful to deal with at times, and I think a lot of people would rather present their fully baked pie and their fully baked technology for third party eyes. But, A, I think there’s some very smart engineers that can help you kind of prove out your concept. And I think when it comes to talking to lenders and investors alike, having somebody who’s seen you at different decision points evolve your technology is hugely helpful and bring some credibility to your project. Another thing I would say is try to explore technology reps from EPC contractors. Those may not always be possible, but you’ll learn something in the process about where you are in the technological readiness scale. If you do get a price and someone is able to take that risk. You’ll also have one bookend of what it could look like to finance a project. So you’ll be able to get longer-term, lower-price financing if you have an EPC rep, for example, from Invetile, then if you kind of go with a more multi contract strategy, higher risk, less CapEx, but more expensive financing. So at least you can kind of way out what your options are on finance ability. So limited support is something that can be explored in lieu of a full completion guarantee. Again depending on the project and the level of novelty.  Lenders don’t need a full debt undertaking. They just need cover for the risks that they’re not willing to take. so, technology failing and not working as planned. So this could be in the form of, sponsor support. So limited recourse, if you will, for some of those technological risks. Or it can be the form of insurance products which are becoming more popular and on which we could probably do a standalone podcast. One trend I would like to see is for the DOE to be able to engage project finance banks earlier. It’s great that they are funding a lot of these projects and giving direct loans, but it would be more positive for the project finance industry as a whole if they were able to, for example, provide cover for third party financing such that lending teams would be able to start socializing hydrogen, carbon capture, renewable natural gas, into their credit teams, and anticipation of what’s going to be a pretty quick step change for financing. The off mentioned, ‘crowding-in capital’, versus ‘crowding out’, and making things happen.

Roman Dubczak: Thanks, Luisa. James, following from Luisa’s point on, the dynamics of emerging technologies in the energy transition, where do you see the most potential for success, probably in the near to medium term?

James Wright: Sure. Undoubtedly the most near to medium term potential success is still renewable energy. It’s the low hanging fruit. Not only is there a lot of legacy thermal generation capacity that has to retire in the coming decade, whether we like it or not, but again, that digitization of everything is really driving demand. These are proven technologies that have deep ecosystems supporting them across the supply chain. Engineering operations, proven reliability and cost competitive, very importantly, against those other legacy assets. You also look at the breadth of ownership of these assets. I think that’s really interesting. There’s been a deep support from the equity markets for long-term investment in that space, and I don’t see that changing anytime soon. So renewables undoubtedly is going to have more room to grow. Those aren’t the only areas though. I think undoubtedly transportation segment is also seeing a shift. We’ve all seen announcements recently from the major car manufacturers. Fewer ICE (internal combustion engine), only cars being manufactured in the decades ahead. Lots more hybrids and EVs across all the major manufacturers. And again, an ecosystem of new charging networks and fueling solutions to meet those needs. We’re seeing real dollars now going into the ground to ignite the hydrogen economy. Government incentives from the IRA, a big tailwind there. We’ll spend an episode on that alone talking about the hydrogen rainbow. New green hydrogen capacity is already being built here in the US now. Some of it’s domestic consumption, some’s for export as a transportation medium through e-Natural Gas and similar fuels. As we talked about in the last video, I think it also be remissed of us not to mention the gas markets with two lenses. The natural gas power market is still filling a really important hole as we try to roll out renewables as quick as we can and get those interconnection spots secured on the grid at the same time, as catering for that digitization of everything. Again, the data centres and so forth, we talked about before. Also as an export thesis, LNG supply is still a critical part of that transition theme to our allies and trading partners around the world. There’s still a ton more export capacity on the docket, notwithstanding the temporary pause in the Biden administration, and we don’t see that changing.

 Roman Dubczak: Excellent conversation, James, Luisa. Thanks for helping us deconstruct some of the concepts and themes in this super rapidly evolving area. There’s a lot to digest, and I’m pretty sure we’ll be updating this topic on following sessions. And, you know, we’re going to be launching a series of podcasts in the future on each of these specific topics that you’ll be hosting. So I’m looking forward to listening in on those. And I’d like to thank all of your clients for joining us today. Hope you enjoyed the topic. Hope you found it compelling, and we look forward to hearing from you and speaking with you again soon. Thank you.